Margin and Opportunity

Microsoft and Google, Fed blaze, and Adam Neumann

the going-ons simply keep on going on

I feel like I begin every newsletter the same - “things are weird”.

Well, reader, things are still weird.

• Speculative mania is still going on, even in the face of the Fed absolutely ripping on rates. ARKK is somehow up, Bed Bath & Beyond bounced (somehow bringing Carvana back from the grave), and retail investors are still in the market with fierce fervor.

• The physical world economy is booming, which is the opposite of what companies prepared for during pandemic times. Everyone thought the metaverse would be the main thing, but desire to unplug and desire to not be inside all day reversed all of that.

• Bing could be the new Google as Microsoft goes into AI-Powered search. Google released their version, the Bard which is “a new experimental conversational GoogleAI service”, but they are too reliant on search ad revenue to really innovate in the space. And Microsoft is going ALL in - to the point of losing money.

  • He said in the FT - “From now on, the [gross margin] of search is going to drop forever… There is such margin in search, which for us is incremental. For Google, it’s not, they have to defend it all.” Google’s margin is Microsoft’s opportunity. And this is good. Big Tech sort of stagnated (or at least it felt like it) so having them battle it out is net-good mostly likely.

• The Fed came out this week and stared directly into the camera and said “we will raise rates until the skeletons buried underneath us rise from the ground”. The market believes the Fed, but no one really knows what to think about anything. It goes back to that first point - labor market strong, financial conditions loosening, inflation kind of going down but maybe not - it’s a mixed bag.

  • But it’s important to note that it’s not really about pace anymore for the Fed, its more about level. Rates are HIGH. For the Fed to hike 50 bps again, inflation would have to explode upwards again. Or the labor market adding more than 200,000 jobs in a month

• Adam Neumann came out to explain what his new company does, and he is just so completely detached from any element of reality. The idea is community-owned apartments I think, so that way people feel like they are part of a community. Rather than calling a plumber, you’ll plunge the toilet yourself, is the overarching thesis.

  • I think community focused concepts are great, and that’s what Neumann did with WeWork and that clearly worked (for him). But the whole allocation of capital to half-baked ideas that are based on “value creating mechanisms” via financializing our entire existence is a thematic that creates more harm than good.

So we’ve got a weird economy

1. The Fed has been ripping rates

2. The labor market is booming

3. Inflation has fallen quickly

Right, so things don’t make sense. The economy is narrative, narrative is emotion. And we don’t really know how to process our emotions, especially in the context of big things like The Future. As written by Eric Berne in “Games People Play: The Basic Handbook of Transactional Analysis.”

"Because there is so little opportunity for intimacy in daily life, and because some forms of intimacy (especially if intense) are psychologically impossible for most people, the bulk of the time in serious social life is taken up with playing games."

We play games all the time.

The American Dream™️ can be come somewhat of a game, akin to Sims 4, where you wake up, go to work, go home, rinse, repeat. And that was the *ideal* game for a long time - work that 9-to-5, have 2.5 kids, then chill out once you hit 65.

But the American Dream sort of game isn’t accessible anymore. People have to find other cheat codes in order to make the game work. Those cheat codes right now are $FAST MONEY$ which is why low quality stocks are still zooming, why we still see speculation, why there might be this disconnect between monetary policy and reality (if possible) - there is no other option other than to play the game.

As Neil Postman wrote:

“People will come to adore the technologies that undo their capacities to think”

You have to amuse yourself to death, to replace information with entertainment. And that’s a difficult pattern to reverse.

Emoconomics

When we talk about things like GDP or CPI it essentially boils down to how the actions of people impact people. It’s a feedback loop of decisions made, and events happening, with varying consequences and impacts. Both the negative and the positive vary - everything is a mix. But the most important underlying of all of this -

People are the root of everything.

The economy is a circuit board of people, interacting with each other and other things, money is the electric current, lighting up to create the system as we know it. Our interactions are the economy.

• It is as simple as buying a cup of coffee - the beans have to be grown which involves land and labor, the beans have to been harvested and transported which involves infrastructure and shipping, the beans have to be stocked and sold, which involves you or I and a monetary transaction.

If one day the beans went up $10 - we would seek substitutes. But if *all* the beans went up $10 we would be forced to bend to the laws of supply and demand (and probably some price gouging). But paying that incremental +$10 for some coffee doesn’t feel great. And it influences how we experience the rest of the economy.

It’s very well known that economics is emotional - in fact, it might be better described as emoconomics at times. The problem is, we do not give our analysis any room for emotion, we only interpret it quantitatively. It’s easy to say that the economy is this purely number-driven world and not recognize the level of irrationality that pairs with most measures that we use to evaluate economic success.

We measure “economic success” through metrics like GDP and GDI, which are great for getting an idea of what is happening, but don’t recognize the true scope of what is going on. Many have written about how GDP kind of sucks, but a more important note is how the suck manifests in our lives.

• When we use metrics that kind of suck and those metrics say that things suck, we get a double-taxation of suck.

• For example, GDP doesn’t capture a lot of the detail of the economy. It kind of sucks. In fact, some of the data might be wrong.

• This margin of suck is important - if the metric can’t even measure how much things suck but then loudly underscores that yes-indeed-things-suck-out-here - it is a very bad combination for consumer sentiment!!

Of course, numbers are important. They drive the narrative, and there is an important element of truth in them both quantitatively and qualitatively.

Most people don’t *really* experience the economy directly through GDP mismeasurement. They experience things mostly through what is tangible - and for many, that’s food prices and used car costs and rents and mortgages. In the United States, the increase in gas prices roughly correlates to the decrease in consumer sentiment - for a good reason. It’s the gap between data and reality.

1. We are swayed by prices, and if prices are bad, we feel bad.

2. If we feel bad, the economy feels bad.

That is a very short and reductive summary of George Soros and his work on reflexivity and Keynes and animal spirits, but that’s the gist of it. If someone comes up to you and says, “things are so AWESOME right now” after you just paid 50% more for your coffee - you’re likely going to disagree with them. A combination of feelings and expectations, fueled by data.

I’ve cited this passage from Fischer Black’s 1986 paper Noise before, but it’s excellent-

I think that the price level and rate of inflation are literally indeterminate. They are whatever people think they will be. They are determined by expectations, but expectations follow no rational rules. If people believe that certain changes in the money stock will cause changes in the rate of inflation, that may well happen, because their expectations will be built into their long term contracts.

And that is the economy - what people think it will be. Of course, the data shapes our reality - but a large portion of the data is influenced by vibes. And if the vibes get worse - well, so will the economic reality we exist in.

I think this example is really stark here. There was a thread that talked about building a multibillion dollar company in… religion.

• But of course, religion has always been a product. Bundle belief, pay 10% of your salary, ticket to ideally some type of heaven when we enter into the next. But it was strange to see it spelled out like that - “here buddy, you can make millions building Religion™️”.

But that’s really everything right now - the creditization of pizza (for four monthly payments, you can afford pepperoni AND cheese), the financialization of existence (become a valued member of our community for $49.99 a month) and the profiteering of… everything. And I don’t think any of this is net-bad - like sure, you should be able to take out a loan to buy a pizza if you want and sure, you can tokenize everything you do but… should you? And what does it mean if we do?

The game becomes very serious when that happens. When you watch the actions of the Fed, it’s largely about slowing the economy down to slow inflation down so the labor market can stabilize so the economy can stabilize. It’s all these little nudges that are meant to disrupt short term order and flow for long term order and flow. But this is when the game begins to fall apart.

Final Thoughts

Emotion might drive the economy, but it shows up in different ways for different people. Everyone experiences the *number go up* side of inflation, but that experience causes different consequences for different people.

There are two economies - one in which the increase in gas prices is a mere annoyance, an extra few bucks here or there, and another in which the increase is catastrophic, means that there is less food on the table for a few days.

Wealth inequality has only gotten worse, and the divergence in ‘vibes’ is demarcated by the widening gap between those that can shrug off inflation and those who cannot.

The Fed’s primary tool to reset the vibes has been to raise rates, which has a direct impact on consumers through higher mortgage costs, higher debt servicing costs, and just a higher cost of existence.

• Now we are in this weird matrix of inflation becoming disinflationary where companies have stockpiled goods because of supply chain worries, and now they have too much, which results in discounts - and all the inflationary pressures shift into disinflationary spirals.

• Our economic models don’t always consider how people feel - scientifically speaking, the vibes. What is the opportunity cost of the loss of faith in a better world?

The combination of a lack of belief with a breaking macro environment (compounded by a social media and hyperonline populace) has made it so we *can* talk ourselves into a downturn through tipping dominoes and feedback loops.

Reflexivity, animal spirits, vibes - what people feel matter. And we have to begin designing our models and theories and frameworks with that in minds.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.